Treatment of China in UK trade remedy investigations
TRA makes first dumping calculation for Chinese exporters
Although the TRA has made final determinations in numerous transition reviews, all the cases involved low volumes of exports and low cooperation from the exporting producers. Thus, the TRA has not yet done any calculations of dumping margins for a Chinese exporter. The aluminium extrusions case (new case not a transition review) is the first case where the TRA has calculated dumping margins involving Chinese exporters.
The UK industry applicants for measures on Chinese aluminium extrusions claimed that state distortions in the Chinese market mean that no Chinese prices or costs can be used in establishing normal value and the level of Chinese dumping. It made the claim that normal value should be established on the basis of Regulation 14 of the UK dumping and subsidy regulations, in line with China's WTO protocol of accession. In the alternative, the applicants argue that normal value should be established on the basis of Regulation 8, particular market situation.
No major trade remedy authority treats China as a full market economy in terms of consistently using prices and costs for the purposes of dumping calculation, though there are a variety of approaches both in terms of the practice and the WTO provisions used to justify the approach.
This is the first case where the UK has revealed its approach to Chinese state distortions in an actual investigation. This post will highlight the key features of that approach.
Dealing with state distortions under WTO rules
Before looking at the UK legislation it is useful initially to set out the various possibilities in the WTO agreements for dealing with Chinese state distortions in dumping calculations.
The key problem caused by state distortions is the fact that sales and cost data cannot be used in the calculation of normal value. The WTO provisions relevant to the rejection of sales and cost data include the following:
Pure non-market economy - Article VI of the GATT 1994 allows use of a different methodology where a) a country has a complete or or substantially complete monopoly of its trade and b) where all domestic prices are fixed by the State. In the case of China, these conditions are not met and thus China cannot always be treated as an NME under normal WTO anti-dumping rules, even where significant state distortions might exist.
Other forms of non-market economy - In DS397 - EC Fasteners, the Appellate Body made reference to "lesser forms of non-market economies that do not fulfil both conditions" of the Article VI provisions above.
Chinese WTO protocol of accession - Due to a general acceptance that China is not a pure non-market economy as defined by the provisions of Article VI, special rules were written into the Chinese accession protocol to permit, in some circumstances, continued use of non-market economy methodologies. This is one example of a 'lesser form' of NME as quoted by the AB in DS 397. Paragraph 15 of the accession protocol authorised other methodologies to be used in the case of China. There is some controversy about whether these provisions still apply to China which I set out in a separate post. In the post I set out my analysis of why I think that the protocol provisions do still apply to China and why they are relevant in this context.
Particular market situation/Ordinary Course of Trade - State distortions can also be addressed as a 'particular market situation' (PMS). This was clarified by the panel in DS529 - Australia A4 Copy Paper and I have written a separate blog post on this ruling. However, as set out in the blog, particular market situation provisions apply to all WTO Members and are not only concerned with non-market economy situations as outlined in the preceding bullet points. This means that there are more conditions and limitations on how PMS can be used in addressing state distortions compared to any of the NME provisions set out above. I also mention 'ordinary course of trade' here. I don't know of any trade remedy authority that has determined that state distortions could be a reason for finding that sales are not in the ordinary course of trade. But I think that this is at least a possibility. In practical terms, however, even it this was permissible, I don't think that there would be any difference between addressing state distortions as a 'particular market situation' or 'not in the ordinary course of trade'. The rules that would apply in terms of rejecting and replacing data would be similar in either situation. Thus, it is likely that WTO members will use PMS to address state distortions where they are no longer using an explicit 'non-market economy' approach.
UK law implementing the above WTO provisions
Pure non-market economy - Regulation 14(1)(c) of the dumping and subsidy regulations allows rejection of sales and cost data and a different methodology according to the provisions of Article VI of GATT 1994.
WTO protocol of accession - Regulation 14(1)(b) authorises a different methodology to be used where the terms of WTO membership contain specific provisions regarding the determination of normal value. Three countries have such provisions in their WTO accession protocol (China, Vietnam and Tajikistan), although there is some controversy around whether the provisions still apply to China and Vietnam (see separate blog post on this issue).
Particular market situation - Where there is a PMS, regulation 8 allows the construction of a normal value based on cost of production plus a reasonable rate of profit. Subject to certain conditions, costs should normally be based on the records kept by the exporter. One of the situations where costs might not be based on the actual records is where there is a particular market situation. Regulation 13 allows adjustment of cost items where they do not reasonably reflect values that would apply if substantially determined by market forces.
As the system has been created, both DIT and TRA have consistently signalled the intention that PMS would be used to address state distortions in relation to China or any other country. In this regard, the statutory guidance provided by the Secretary of State to the TRA includes a section on 'particular market situations and cost adjustments'.
To the extent that the issue has arisen in the transition reviews, and in the aluminium extrusions investigation, the TRA has addressed the issue of state distortions under PMS.
Neither the government nor the TRA have made any official statement in relation to regulation 14(1)(b) and the possibility of treating China as a non-market economy. Further comment is made on this below.
TRA’s first China PMS determination
The TRA has recently set out its first findings on the use of ‘particular market situation’ in the calculation of normal value in the aluminium extrusions case. The investigation is still ongoing but the TRA has published its statement of essential facts (SEF). Although it is possible that the final recommendation to the Secretary of State may vary, the SEF does provide an initial indication of how the TRA will handle PMS in future cases.
This is a critical issue. It may be highly technical and nerdy but it really affects, very significantly, the level of dumping margins.
The first point to make is that the applicants claimed that the TRA should use Regulation 14(1)(b). The SEF does not even mention this claim. This is consistent with some of the transition reviews that have already concluded where UK industry requested the use of Regulation 14(1)(b). It might be considered somewhat odd that, despite the explicit claims for its use, the TRA has not set out the basis of why it has rejected such claims.
The TRA accepted that there are state distortions that constituted a particular market situation and a constructed normal value was used. The following summarises the TRA's findings:
There were 3 exporters for whom dumping calculations were completed.
For 2 of the companies, the TRA agreed that there was a PMS for aluminium inputs and energy and 3rd country values were used to replace the Chinese data. All other costs were accepted for these 2 companies, meaning that the TRA rejected claims in relation to other costs on the basis that there was no evidence of PMS or because the PMS did not have a material impact on costs or prices of the goods concerned.
For the 3rd company, the distortions identified for aluminium and energy costs were found to not apply due to the fact that the company operated a highly integrated production process.
The TRA does not seem to be accepting any arguments that there are horizontal or systematic distortions that affect all Chinese producers. It is, in effect, starting from a default position that Chinese data will be used in the construction of normal value unless there is firm evidence of distortions. Further, the TRA seems to expect evidence to be submitted that each input cost is distorted. The burden of proof is on applicants to identify the distortions which clearly differs from the approach of other trade remedy authorities (see comments on EU and US approach below).
Apart from energy costs and inputs the TRA seems to reject any other distortions in one sentence (117), despite the fact that the UK industry applicants had submitted detailed claims and evidence that other costs are distorted. There is no evidence on the file that any analysis was done to assess whether distortions exist for other items such as capital, land, and labour costs. From the non-confidential exporter questionnaires there is no indication that the exporters provided any evidence that their costs are not distorted (apart from statements that no distortions exist). And there is no indication that this was even discussed in the verification notes, never mind probed.
Let's be clear here. The TRA has given one of the 3 Chinese producers full market economy treatment. The implications of this are that the anti-dumping duty levels are relatively low (see below).
From a UK industry perspective, two key issues arise from this approach. First, UK industries rarely have access to comprehensive and definitive evidence of state distortions for each and every cost item. Second, if the TRA systematically gives Chinese exporters 'market economy treatment', it is inevitable that duty levels will be low. These implications are further discussed below.
Comparison with the approach of other countries
Although there are WTO uncertainties around the issues related to dealing with state distortions (and more panel/Appellate Body decisions are needed for there to be any certainty), my view is that there is scope to use PMS more comprehensively for aggregated input costs. In addition there is also the possibility to treat China as a non-market economy which exists in the UK legislation (see separate blog posts for more on these issues: PMS NME). These approaches are being used by the EU and US respectively.
EU - The EU has recently imposed anti-dumping duties on aluminium extrusions from China. In the provisional regulation (2020/1428) the European Commission set out its methodology in relation to Chinese normal value. The EU doesn't explicitly specify that it is using a PMS approach but it is effectively adopting an approach similar to that of the TRA. However, there is one big difference. The Commission concluded that "the available evidence relating to China’s intervention in its economy in general as well as in the aluminium sector (including the product concerned) showed that prices or costs of the product concerned, including the costs of raw materials, energy and labour, are not the result of free market forces because they are affected by substantial government intervention". The Commission concluded that "it is not appropriate to use domestic prices and costs to establish normal value in this case" and proceeded to construct normal value "exclusively on the basis of costs of production and sale reflecting undistorted prices or benchmarks".
US - The original US investigation on aluminium extrusions was in 2011 and China was treated as a non-market economy. The US continues to treat China as an NME in anti-dumping investigations as evidenced by the recent preliminary determination on freight rail coupler systems (A-570-173 USDOC Decision Memorandum for Preliminary Determination March 8, 2022). The DOC stated that under US law "any determination that a foreign country is an NME country shall remain in effect until revoked by Commerce. Therefore, we continue to treat China as an NME country for purposes of this preliminary determination".
In both the case of the EU and US, no Chinese prices or costs were used in the construction of normal value. This contrasts with the approach of the TRA where only two cost items were rejected for two of the companies. The different approach is apparent in the EU and US duty levels as shown in the table below. The table below also includes duty levels from other investigations on Chinese aluminium extrusions around the world.
Dumping margins for exporters
Weighted average dumping margins for cooperating exporters
Press Metal International was sampled by various jurisdictions
Dumping margin: residual margin for all other exporters
The above duty comparisons indicate that the impact of the UK's approach in relation to establishing Chinese normal values will result in lower measures than typically applied by other countries.
Political Decision on “market economy status”
In a recent blog post on the importance of paradigm in trade remedy investigations I argue that trade remedy authorities operate within paradigms and that there are always political aspects to the discretion that the TRA has to exercise even within the constraints that the TRA has to operate.
I think that there are that are effectively two political decisions that have been taken here by the TRA. First, the TRA has decided not to use Regulation 14(1)(b) and not even to engage with claims that it should be used. Second, the TRA has decided to adopt an item by item approach to evidence on individual cost items rather than the possibility of using a more horizontal/aggregated approach that the WTO rules would allow.
I am not criticising the TRA here. The TRA is approaching these issues in terms of attempting to establish objective facts and evidence. In the contact that I have had with TRA officials I do believe that they are trying to do the best job possible. My point is that the TRA has been left to make big political decisions that really should be made by a politician.
By putting the burden of proof on applicants to establish that each cost item is distorted, the TRA has effectively taken the decision to make it much easier for Chinese exporters to effectively obtain full 'market economy status' for the purpose of anti-dumping investigations. This has very significant implications as indicated by the relative levels of duty in the various investigations that have imposed measures on aluminium extrusions.
The approach on burden of proof contrasts with that in the EU where the EU has split the burden of proof. It is the responsibility of EU industry applicants to provide prima facie evidence of cost distortions. The Commission has greatly aided EU industry by producing a comprehensive report on Chinese distortions which has meant that the individual applicants do not need to gather the same information for every case. The burden then shifts to the exporters to provide evidence that their costs are not distorted.